What is a Living Trust comments (3)

By Katie Banks+ | Thursday January 7th, 2013

Let’s suppose you’re the Chief Financial Officer of your home.  Now, let’s suppose further that you’re married or in a partnership, and that you’re a parent. Each of these roles entails a great deal of responsibility.  Given these circumstances, one of the most important things you can do is to ensure that, should the very worst happen – should you and/or your partner die – all of your assets will transfer to the right people. 

The peculiar thing is, most of us think in terms of what would happen ”...if I died” or ”...if my partner died”. But here’s the stark reality:  we’re all going to die at some point.  Sure, the plan is to pass away peacefully sometime in our ripe old age. And chances are good that we will.  But ensuring now that your assets will transfer to the right people in the event of your death is a smart, savvy, loving thing to do.

According to a November 2007 survey commissioned by BankRate.com, 76% of respondents believed that “…everyone should have a will (or a living trust),” yet 57% of Americans do not have them!

Not having a will or living trust means that, when you die, there is nothing set up to explain what is to be done with your money, your assets, your children and with everything you own.

It may not sound like a very big deal, but it is.  Let’s explain why.

We’ve all heard of a will – it’s a frequent plot tool in sitcom hijinks, and one way to handle the task of distributing your assets.  The living trust is the will’s lesser-known, bigger, badder cousin. 

The living trust does two extremely important things.

1.  The living trust transfers ownership of all your assets to a trust while you’re still alive.

These assets can include everything of substance that you own. For instance, your house, your car, your investment accounts, and your properties can all be included.  While you’re alive, the transfer of your assets to the trust really has no practical impact on your ability to use, manage, or control these assets.  Said another way, you can do all the same things with these assets that you could do with them before you transferred ownership to the trust.

2.  The living trust designates who should be given all of your assets after you die.

As you designate who should be given the assets described above, you also include specific instructions about your most precious, irreplaceable beings:  your children.  Who should take care of them if you should die while they’re still young?  If this happens and you don’t have a will or living trust, the decision is made by a stranger in probate court. Difficult to stomach, isn’t it? So yes, dying without a living trust or a will containing instructions on where your children should go, is a big deal.

Advantage of a Living Trust over a Will

The big advantage that the living trust has over a simple will is that your assets won’t have to go through probate court after you die.  By avoiding probate court, you avoid a bunch of strangers interpreting the instructions you wrote in your will about who gets your assets.  Because of this, your children (and whoever else you chose to receive your assets) can save thousands of dollars in legal fees.

The Living Trust Maintains Your Estate’s Privacy

There is another, very ugly piece of drama that your children and other heirs can avoid by setting up a living trust. The living trust maintains your estate’s privacy.  In contrast, if you die without a living trust or a will, and your assets go through probate court, all of the details become public record.  There are people who make a fortune by waiting for people to die “intestate,” which means to die without a will or living trust.  These people actually show up at probate court and claim that the deceased was a dear old friend who promised them some hefty sum, like $50,000.  Then your children may spend thousands of dollars and months or even years in court, trying to defend against such fraudulent claims.  The living trust effectively eliminates this scenario from the picture entirely.

Tax Advantages of the Living Trust

The living trust may also have a tax advantage after your death, if it’s written properly.  If you have a large estate, worth more than $650,000, a living trust that has been well tailored for your specific situation can save your children and other heirs tens or even hundreds of thousands of dollars in unnecessary taxes upon your death.  Estates worth $650,000 and under pass on tax-free to heirs.  However, having an estate worth less than $650,000 is not a good reason to skip the living trust or will, because doing so will still land your assets in probate court, which can involve the whole hot mess described above.

How to Set up A Living Trust

There are many different kinds of living trusts, and many different ways to tailor each of them to your specific needs. There are software programs available that can walk you through establishing a living trust.  However, we at FinancialRx recommend that you meet with a skilled estate-planning lawyer.  It will cost more. But the end result will be of much higher quality, and the trust will function for your children the way you intended it to, after you’re no longer around to care for them.  And as parents, we know there’s no more important or rewarding job on earth.

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Comments for What is a Living Trust
By Jemifus on January 08, 2011

Hey Wendy,

Thanks for the clear and informative article.  I have two questions maybe you can answer.

1. Can you elaborate on which taxes are avoided by using a living trust?  How does this work?

2. Any advice on where you would go to find a good estate-planning lawyer (especially in Southern California, where I live)? 

Thank you,

By Wendy Mihm on January 10, 2011

Let me address question #1 here.  The Living Trust helps to minimize estate taxes by maximizing each participant individual’s (that is you and your spouse) Estate Tax Credit under U.S. tax law.  The 2011 Estate Tax Credit currently shelters up to $5Million—this means that up to $5Million worth of an estate may be passed on tax-free.  With only a will in place, a married couple and their estate receives just this $5Million exemption, total.

When you establish a Living Trust, you have the opportunity to include a very common option the called “A-B Provision.”  The A-B Provision is fairly straightforward:  when one spouse dies, the Living Trust splits into two trusts (A and B) and each trust receives its own $5Million tax exemption, thereby doubling the tax exemption to $10Million for the overall estate.

This is why I indicated in the article above that the tax advantages may accrue if the Living Trust is written properly, to your specific situation, and is particularly valuable to those with a large estate. 

As to your second question, my husband and I are also currently in the market for a good estate planning lawyer in So-Cal.  If you wish to email me directly at wendy@financialrx.com, I would be happy to share that contact with you once I establish it.  Thank you for your thoughtful questions!

By May Wilson on March 28, 2011

This has been a monkey on my back for years. i’m going to get this done before the end of April or else. Who else is with me on this? I’m tired of worrying about what would happen should something awful happen.  I promise to repost when I’ve set up a living trust!!!!

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